Aarti Industries Limited (524208) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Aarti Industries Limited Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shiv Muttoo from CDR India. Thank you, and over to you, sir.

Thank you, Lizan. Good evening, everyone. Thank you for joining us on the Aarti Industries Q2 FY '22 Earnings Conference Call. We have with us today on this call Mr. Rajendra Gogri, Chairman and Managing Director of the company; Mr. Rashesh Gogri, Vice Chairman and Managing Director; and Mr. Chetan Gandhi, CFO of the company. Before we begin this call, I would like to point out that some statements made in today's call may be forward-looking in nature and a disclaimer to this effect has been put in the results presentation shared with you. I would now like to invite Mr. Rajendra Gogri to take you through the performance of the company and his outlook on the business. We will then open the forum for Q&A. Over to you, sir.

Thank you. Good evening, and a very warm welcome to all of you attending this call. I hope all of you and your families are in good health as we start seeing things coming back to normal. I trust that all of you would have received the Q2 FY '22 results presentation that has been uploaded on the stock exchange website earlier today. First, a review of our financial performance. As you may have seen, the first half performance reflects the strong traction we have been witnessing and also puts us firmly on track to meet our growth guidance, as shared earlier this year. Our revenues crossed INR 1,750 crores during the quarter, which was up by about 33% on a Y-o-Y basis and over 17% on a Q-o-Q basis. During the quarter, we continued to witness the sharp increase in raw material prices, fuel prices and logistic costs, which also contributed to the increase in top line of the quarter. Q2 EBITDA of INR 310 crores was fairly similar to EBITDA during Q1, and higher by about 22% as compared to last year, led by increased utilization of capacities and a value addition of the product mix. The last quarter, Q1 FY '22, we had witnessed rupee depreciate about INR 1.2 versus the U.S. dollar resulting into a mark-to-market loss for the ECB, causing a rise in finance cost by over INR 13 crore. This was normalized in the current quarter. And with the QIP proceeds fully being utilized, the reduction of debt, which helped in reducing the finance cost for the quarter. Our profit after tax came in at INR 176 crores, up 25% over Q2 FY '21 and about 7% more than PAT for Q1 FY '22. With this performance we recorded a profit of INR 341 crores for H1 FY '22, which is about 65% of our profit for FY '21. Both the top line and bottom line in the reported quarter are our highest ever in the history. As that we have successfully extended the growth momentum achieved over the last 4 quarters and have progressed well from the impact of the pandemic, which affected us significantly in the first half of fiscal. Continued volume expansion along with the pass-on for the higher input costs and logistics costs is -- in the Speciality Chemicals business as reflected in jumping top line of about 36% on Y-o-Y basis. and about 20% on Q-o-Q basis for the segment. We have seen the return of demand from established market to almost pre-COVID levels, and in some cases, it has surpassed the pre-COVID demand volume, that are clearly driving improved EBIT. Segment EBIT of INR 242 crores for Q1 FY '20 progressed is a growth of about 4% in Q-o-Q and about 29% Y-o-Y basis. As you are aware, we have a pricing model wherein the variations on the raw material are passed onto the customer. That's the better way to look at our performance as change in absolute EBIT, while we are witnessing a significant and continuing rise in the prices of various key commodities. The fuel price rise is emerging from the coal crisis, where our situation was unprecedented. We have taken significant efforts to ensure that the business remains insulated from this crisis and also look to pass on the substantial part of this cost to the customer while having to bear a part of it. We hope the situation will normalize in the coming months, the sector has also resulted in the increase in working capital for the company. However, our well-capitalized balance sheet has enabled us to manage the situation pretty well. Now for the Q2 production update. Production for nitrochlorobenzene was 20,347 metric tonnes compared to 17,830 metric tonne a year back. Similarly, hydrogenated products, we achieved production of 2,712 metric tonnes compared to 3,038 metric tonnes last year. On the nitrotoluene front the production for Q2 was 3,772 metric tonnes compared to 4,119 metric tonnes in the same quarter last year. We operated over 80% to 90% capacity utilization across our established locations and expect to deliver steady performance improvement going forward as new facility scale up volumes. Our Pharma business grew up by 15% Y-o-Y to about INR 278 crores during Q2, which was similar to the revenue of INR 276 crores for Q1 FY '22. The business continues to maintain growth momentum based on the higher utilization facilities that are driving volume. EBIT for the Pharma segment for Q2 FY '22 was lower to INR 41 crores on account of the impact on margins due to high inventory of the final product, which could not be shipped out. Although there has been a time lag on the pass on of the raw input cost increase, which, along with the certain start-up related costs for the new scale-up facility coming on stream impacted the EBIT for the quarter. Strong business visibility in Pharma is based on higher volume from regulated markets to value-added products and new introduction of intermediate products. As you would know, we are currently implementing additional capacities for APIs that are expected to be operational in the second half of FY '22. We expect volume expansion to be supported by robust margin in this segment based on a pipeline of approvals that strengthen our position in therapies such as antihypertensive, cardiovascular, oncology and corticosteroid. Now an update on capital expenditure. We have incurred CapEx of INR 317 crores in the second quarter, CapEx about INR 620 crores in H1 FY '22. Again, the annual plan CapEx of about INR 1,200 crores to INR 1,500 crores. At present, we also have several other capital investment projects in the pipeline. This includes expansion of the U.S. FDA facility at API located at Tarapur and at the intermediate unit at Vapi, set up of production units of the second long-term contract at Dahej SEZ, via for the second -- third long-term contract at Jhagadia and the NCB capacity expansion at Vapi, expansion cum asset upgradation for our acid unit at Vapi amongst various other projects which are underway. As guided last time, we are also undertaking various new projects driven by R&D and innovation, which will add over 40-plus products for chemicals and 50-plus products for Pharma segment, driving growth beyond FY '25. This initially will provide the blueprint of growth for the longer-term horizon 'till FY '27. The company, at its Board meeting held on August 19, 2021, had considered and approved a scheme of arrangement whereby the Pharma business and allied activities and Aarti Industries Limited would be demerged into Aarti Pharma Labs Limited, a wholly owned subsidiary company of Aarti Industries Limited as a going concern [ basis with ] effect from the appointed date of July 1, 2021. As per the scheme, the demerged company would demerge its pharma business and allied activity along with part of speciality chemical, which is a backward integrated facility providing chitin materials to Pharma business. The same part of speciality chemical segment being demerged account for less than 3% of the revenues of the Speciality Chemicals segment. The demerger undertaking relates to pharma manufacturing units, allied activities, investment with cash balance and cash equivalents, the future capital expenditure of the demerged entity. The demerger will enhance the focus and enable to adopt the relevant strategies necessary for promoting growth and expansion. As per the team, the shareholders of Aarti Industries Limited as at the applicable date will get the proportional stake in the resulting company, Aarti Pharma Lab Limited. We expect the process of getting necessary approvals for the same in about 9 to 12 months. As per the restructuring proposed in the scheme, the company has restated the segment financial by reclassifying the part of the Speciality Chemicals business, which is being demerged under the Pharmaceutical segment in this segment report, and the corresponding figures related to the prior periods have also been rearranged in a similar manner. Over the last year, we witnessed various global events, which added to the volatility of the business environment. We wish to add that the -- company is voting about sort of this event and are taking adequate measures to mitigate itself and also drive opportunities from the new emerging trends evolving out from these events. We believe to be, long-term, manufacturing from the various events unfolding in China and will add significantly to the China Plus One strategy and place India as a fast growing and sustainable global supplier of choice to our customers. To conclude, I reiterate our vision to grow during this Golden Era of opportunities for the Indian chemical and pharmaceutical industry and also to enhance its share in the global market. We remain committed to work on these opportunities and drive the growth journey, which we have guided to you during the last con call. In FY '22, we remain enthused about the short term and our long-term prospects of business. Based on this visibility, we continue with our growth guidance of 25% to 35% for FY '22. With that, I conclude my opening comments, and we will open the floor for the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Ritesh Gupta from Kotak Mahindra.

This is Ritesh from Kotak Institutional Equities. Congratulations on a good set of numbers. Just one question on the profitability that we've seen in the first half. This profitability is also on the softer base of last year and you did quite well with 40% growth on EBITDA terms on a first half basis. But let's say, as we get into the second half, as we kind of see the base also get a little stiff, plus the raw material inflation and the fuel price inflation that we have seen, it has gone unprecedented after the quarter 2. What's your sense as you get into quarter 3, quarter 4 in terms of the kind of inflation? Would you be able to pass it on fully the way you have been able to pass it on in the second quarter? And secondly, with the new capacities, et cetera, getting commissioned, should we expect the cost impact of that coming in, in the second half? Or should we expect that, on a net EBITDA basis also, the new facilities will be able to contribute quite well?

Yes, you are very right. There has been a lot of volatility, especially on various raw materials as well as the fuel and [ we're going to ] see how it pans out in the second half also. But generally, we are able to pass on raw material variable to our customer. And so broadly in the first half, we have got about 65% of the profit throughout the last year. So overall, we see that we should be able to maintain around the range of 25% to 35% annual growth rate for the year. And second half, also some of the new projects will kick in and also will contribute, both to increase the expenses, but also to be able to contribute on EBITDA.

Got it, sir. That's really helpful. And just on the pharma side as well, should we expect the pressure to continue in the third quarter as well? Or do you think all the issues that you saw in the quarter 2 were more temporary in nature? I mean, the reason I'm asking is because some of the other pharma [ ETA ] companies have -- they've not done well in second quarter. They also have a pretty muted second half quarter outlook. So do you share the same -- your commentary suggests that whatever you saw in 2Q seems to be one-off. Is it the right understanding? Or should we expect some profitability challenges in the second half as well?

Yes. In Pharma, Q2 profitability was having impact of 2, 3 reasons. And I think, of course, raw material pass on in pharma takes time. And definitely, that will have an overhang in next quarter. But overall, the new capacities are coming in, in this quarter and in the next quarter and second half of this financial year. And with that, I think, longer term, we definitely will have better performance because as the new capacities kick in, the new production will bring in more opportunity to get into value-added sales.

The next question comes from the line of Rohit Nagraj from Emkay Global.

Congrats on a good set of numbers. Sir, the first question is on the agrochemical intermediate for which the contract has been canceled. I understand that we've spent close to about INR 400-plus crores. What is the current status of that particular facility? Have we started utilizing it? And what is the plan for that facility to put to use?

We have commissioned that plant. And as I mentioned in our earlier con call, we should be starting up the volumes mainly in the FY '23. And by FY '24, we should be able to realize 80% to 90% of the capacity utilization in this plant for the same intermediates.

All right. And this is for some other customers?

Yes, yes. It will be for the other customers.

Right. Sir, the second question is on the other 2 long-term contracts. So we have seen that these have gotten delayed. So is it a deliberate delay because of the -- from the -- I mean, suggested from the customer itself? Or is it because of the COVID-related issues? And when these will be commissioned now?

Mainly, this was a COVID-related issue because we had 2 waves of COVID. So that second contract, we should be -- we are targeting chemical charging in Q3. And the third contract, maybe mainly -- maybe Q1 of FY '23 will be the third contract commissioning.

The next question is from the line of Surya Patra from PhillipCapital.

First question is on the cost rise, what we are seeing in the month of October after the Q2. So how -- for us it would be for passing on the cost to the -- for the -- particularly for the Speciality Chemicals business.

Yes. Generally, we have this raw material pass-through model. So domestic market, it is passed on the same month. And exports tend to...

Hello.

Yes.

Okay. But do you think, sir, since there is -- I mean, although it is like a customized business, large part of our business is customized, but there would be a kind of -- some kind of method in passing on the way the prices has gone up. So even crude also, if you see it now it is from the -- from -- in the last month itself, it has gone up by another 15%. So will you still be able to pass it on swiftly and without time lag the way that used to be for your business?

Yes. As I mentioned, the domestic prices, generally any variation in benzene price or toluene price, it gets passed on because that's how the pricing are normally done. And export, maybe 2 to 3 months lag because this kind of variation in our kind of product, which is not possible for us to absorb. In general, we don't see much issues on raw material plus/minus passing on.

Okay. Sir, and just briefly on the price volume growth for the Speciality Chemical, if you can say that, what are the price-led growth and what is the volume-led growth for this quarter? And what I am seeing that there is a robust growth, obviously, in the domestic market, possibly because that since there are trade challenges in the export side, so possibly, we have managed that trade in the domestic market. That's why the domestic growth look really strong. It is not only for you, but generally for many of your peers also, that is the trend. So if you can clarify on that scenario, sir.

Yes. Chetan, you'll have the number, right?

Yes, I have it. So the volume growth is in high single digits, around 8% or something, and the rest would be the price-driven growth. And sir, you can take up the second question?

Yes. I think logistics are still most -- we are able to manage, like, in some impact on the export front on the volume because of the container availability and issues. So there, we tend to pass on -- divert the material in domestic market. And -- yes.

Okay. Can this growth in the domestic market will be sustainable, sir, if there won't be challenges? Well, because, container availability seems the kind of greater a concern and likely to sustain in the near future, and that is one. On that, if you can add on, too?

Yes. Domestic demand is robust. So what were the -- some impact which might come in export, we should be, in general, I think, should be able to divert the material rearrange our capacities for domestic market.

Okay. Just last one question, sir, from my side. You have mentioned the gross margin turn normalized. So do you see that -- so that means the -- see, we have been seeing a kind of a strong gross margin scenario in some time, 47%, 48% in that range, beyond 45% levels. Now this 42%, you are saying it is a normalized one. So that means that is the kind of range one should think going ahead in terms of gross margin?

Actually, if you see the last year Q2, we had to give in a [ nonregular ] market. So last year, Q2 was -- we had to divert to, because the southern market, the demand was less Indian market. So Q2 was -- even on a nonregular market. So that is now corrected. So whatever supply we have made this year is to a regular market. So that's why we know it is more of a normalized.

Yes. So as a percentage, generally, because if the raw material prices increases, then your gross margin and EBITDA [ a month ] goes down. So that percentage absolute is not a correct measure.

We'll move on to the next question. That is from the line of Rohan Gupta from Edelweiss.

Sir, first question is on this raw material availability and challenges coming from China. So I think that we are also buying some of the intermediates and raw material depending from China. So how is the availability issue is right now? And how we are able to cope it up? And there has been significant price increase also in terms of these materials coming as you do say that you will be able to pass it on. But just wanted to understand from the customer perspective, whether they will be able to take on all the price increase or not.

Yes. Actually, for our speciality chemicals business, we are not buying any raw material from China. So the Chinese impact is not there on our speciality chemical business. And also Pharma also...

Yes.

Yes, Rashesh.

Yes. Yes, so for pharma, of course, raw material availability from China, we operate largely on a higher value-added products. So there, the availability is there. Of course, the projects have increased in China due to higher prices of base raw materials and commodities. So we are able to source the products. Of course, the products which involve phosphorus and this kind of base metal commodities, the prices have risen sharply, but the products are available, and we are able to get these products at a price front.

Okay. And we will be able to pass it on because there is a significant pressure in pharma business margin. So in the current quarter as also an earlier participant saw, do you see that there will be delays in passing it on to the end customers? Or just only that there may be a quarterly phenomena and in general, you have always guided for at least close to 18% to 22% kind of margins in that business. So -- or we will be able to achieve that quite safely in second half?

Yes. I think in Pharma, the pass on will take with a longer time. It can be a monthly pass on. Next month, I can't pass it on, like, how we do in chemical business. It will take at least 1 quarter for us to pass on the increase and the prices have been rising continuously. So last quarter also, we saw prices have increased and this quarter also, the prices are increasing. We are taking steps to ensure that these increases are passed on. And if we are not able to pass on the increase, then we take higher quantities. So whichever way we improve our profitability.

Okay. And sir, second question is if you can just give a update on the...

Yes. Percentage, a bit it -- would be in the same range, 18% to 20%, because we will have more value-added products coming in, in next -- second half of this year. So it will...

In Pharma, sir? In Pharma, you are saying that in second half, margins will be 18% to 20%?

Yes, it will come up there. Yes. Yes.

Despite price increases -- I mean, despite higher top line growth, which will be at least 20% driven by prices, minimum?

Yes, yes, yes. We will be able to get it.

Okay. That's great, sir. Sir, second question is on our contract, too, from SABIC. So if you can just give some update on that at which stage it is right now? And are there any delays on how the customers -- how the product -- when the product start to schedule -- I mean, scheduled to be supplied, sir?

Yes. We are targeting to commission that plant in Q3 this year. So maybe end of the Q3 or Q4, the material supplies should start for that project.

Okay. And will we be able to achieve, sir, full annual revenue run rate from FY '23? Or it will be slow ramp up?

No, we should be able to achieve the ramp up.

Full ramp-up in FY '23 full year, sir?

Yes, yes.

The next question is from the line of Aditya Khetan from Stewart & Mackertich.

Sir, my first question is, again, on the pharma business margins as asked by the earlier participants. So they had contracted seriously in this quarter. In the last quarter also, you had said the reason that the higher inventory costs, which could not be shipped to that line was the similar reason you're setting this in this quarter also. So if you can just highlight how much is the high cost inventory currently on the books? And can we see this to be rationalized in the coming quarter as you have said that the margins could improve from this level to around 18%? So has that impact been taken? Or there is more sort of payments there in the coming quarters?

Yes. Basically, in the -- both the quarters, we had challenges in the [ influx ], because of the shipping challenges. And also, I think, because production delays resulted into the production of final chemical APIs in the very last [ 15 tonnes ] produced in the quarter, which resulted in delay in exports. So due to these goods could not be monetized into profits, and they have remained in stocks. So that will change. We are taking steps overall to control the overall stock of the products that we manufacture and change the product mix in a way that we don't end up with this kind of a situation again.

Okay, sir. If you can just highlight a bit more. So this impact is majorly on the API or API intermediate or in the caffeine segment? If you could just give an idea on...

API. API segment and caffeine segment.

Largely API segment in this quarter and earlier, it was in caffeine segment in previous quarter. Because of unavailability of the containers, we could not ship them out and the containers, which were available, which were on the port, et cetera. So I think the shipping movement is gradually -- as we go along. I think in October, we have seen the situation ease out a bit for Europe and U.S. routes. And going forward, I feel that there should not be any challenge getting this retail shipped out.

Okay. Okay. Sir, why is -- now -- so next question is on the Speciality Chemicals segment. Sir, as you -- as it is very clear, like our business model works on a cost plus basis, so any increase in RM cost also increases the top line consequently. So considering now the commodity prices are at an exorbitant level, wherein the benzene is in currently around INR 90 a kilo. So if suppose there is a case where in the global commodity prices starts to fall and they come to a normalized level, so that could again pose a risk for us in terms of top line. So will you change the guidance of the top line? So considering the -- if the raw material prices starts to fall, so will that change the guidance of the top line? Or will it remain the same and that could be offset from the newer business volumes?

No, no. Generally, our top line guidance is at the constant raw material prices. If there are raw material fluctuations, either up or down, that gets impacted in the top line. So if our raw material prices go down, definitely, that impact on top line will come, but it should not impact the gross profit or EBITDA as such.

Okay. What I meant to say, sir, so will your top line guidance will not change you mean to say?

Yes. Even the our top line guidance will change in general.

Okay. That will be changed then, okay.

Yes. So Aditya, just to add on to the -- generally, our guidance is more driven on the bottom and not on the top line. Top line, you -- as you know, that it's pretty volatile and you don't have a control in terms of how the raw material or the crude -- the prices would be.

Okay, sir. Okay, got it. Sir, my third question is on the chlorotoluene segment. This was a business which we were targeting. Sir, any idea -- any road map, which we had made? So what is the capacity? Anything we had planned on to the newer business segment?

Yes. We are fine-tuning the -- all the capacities and everything, and we'll be starting the construction in next year FY '23.

Okay. Sir, my last question, sir, if you can give the PDA segment volumes, I think that was not given in the initial commentary.

Yes. Just give me a second. The PDA volumes were close to around 458 tonnes.

458 tonnes? And this is compared with the similar number, what was it in the last year?

470 tonnes.

470? Okay, sir. Got it.

The next question is from the line of Arun Prasath from Spark Capital.

Sir, my question is on the...

Sorry to interrupt, Arun. We’re not able to hear you. Can you speak a bit louder?

Am I audible better?

You're still sounding very soft.

All right. So my question is on the first quarter. If we take the performance of the first half of this year and compare against the first half of FY '20, where there is no disruption coming from COVID, generally, the difference is that at the top line level, we didn't book any contract, 1 cancellation driven you on the first half of FY '20, whereas we have some [ caught ] revenue in the first half of FY '22. So definitely on this perspective, the top line has grown by 19 percentage on a CAGR basis, whereas the gross margin hasn't kept pace with the top line growth. It has, in fact, grew at 17 percentage lower than the top line growth. Similarly, the EBITDA has grown only by 10 percentage. So given that the contract on cancellation should flow through the gross margin EBITDA, why we are seeing that, sir, that EBITDA and gross margin is not keeping up with the top line growth. Is there any qualitative reasons? And can it reverse in the coming months and coming quarters?

Yes. As we mentioned, basically, the top line don't connect directly, because it is -- volumes become more crucial in general. So we cannot directly take it on a percentage basis.

Sir, I'm not comparing the gross margin or EBITDA margin. The growth in the absolute revenue and growth in the gross margin and growth in the EBITDA.

Okay. What you are saying is the growth in the -- so that, I think, we are comparing with FY '20, right? So that, we'll have to check up. Yes, so I think that number will have to be checked up because that is 2 years earlier. But in general, because our -- so our new capacities are still on a ramp-up phase, so the expenses are higher. So that impact will come in FY '22. And that -- as capacity gets ramped up, I think that should improve the EBITDA.

Okay. Okay. All right. So specifically, when we are talking about the below gross margin expenses, like shipping costs and all, if it reverses, the absolute pricing will also get reversed? Or we will be able to price it at current levels, even if we see a reduction in the shipping costs and other costs. Are there other expenses or not?

No, no, the shipping freight comes down, the price will come down. Basically, there's additional prices what we are getting because of the higher shipping cost is directly related to that increase in shipping. So if it corrects, then the sales price will also get corrected.

The next question is from the line of Vishnu Kumar from Spark Capital.

Sir, if you could just mention the new projects that will start in the next 18 months? You mentioned that the SABIC contract will start in 3Q. So it's possible to mention the time line when the rest of the projects plants are likely to start over the 18 months? And the indicative CapEx that you will book in the gross block.

So new products mainly -- will start mainly in FY '24, towards the end of FY '24 and mainly in FY '24/'25. That is all chlorotoluene and its downstream and also some new downstreams in existing nitrochlorobenzene and chlorobenzene, more value-added products will come in.

Okay. I was asking more, like, we have a CWIP of INR 1,600 crores, plus you mentioned at the start that for the current year, INR 1,200 crores we'll spend of it. INR 600 crore, we have already spent. So if I take INR 1,600 of CWIP and another INR 600 crores for the rest of the 6 months, so INR 2,200 crores. I want to understand any of this, how much will get commissioned, let's say, in the next 6 months or, let's say, next 18 months? That'd be will be useful.

Yes, that is -- yes, yes, yes. That -- most of them will get commissioned, basically. So that will be -- our -- as said, 2 contracts. Then nitrochlorobenzene expansion will come in play in asset division restoration, which we are doing. And Pharma also, this Tarapur 4 API expansion also will kick in, in...

Sir, any rough CapEx number that we'll take to the gross block will be useful.

Vishnu, sir, I would just request you, if you look at the investor presentation deck, it has a slide in terms of the ongoing CapEx activities, which are expected to be commercialized by FY '23 and also the future ones. So that should address a major part of your query.

Got it, sir. And sir, when we split the Pharma division, how much of the gross block or the CapEx will get bifurcated? Any rough idea on that? If you could just help us on that.

So from the new initiatives, the new profile initiatives, the CapEx, which is targeted at Pharma is in the range of around INR 350 crores to INR 500 crores, so that would get bifurcated.

The next question is from the line of Pratik Rangnekar from Credit Suisse.

Sir, 2 questions from my side. And one, in your opening comments, you mentioned that part of the RM increase was probably getting absorbed. So is the understanding right that this absorption of the higher RM cost is mainly on the export side, where your contracts take a little longer to reprice? Is that understanding correct?

Yes. Generally export, it takes about a quarterly lag.

Right. So there's no spread contraction or anything as such. It's just essentially the time lag in 3 months or 2 months of time, that should balance itself out.

Yes.

Okay. And on the disruptions in China, would some of your competitors also be facing similar issues, which would maybe be beneficial to you? And if yes, how would that benefit come through? Is it in terms of volumes or spreads?

Some places, there are disruption and it will improve -- some of our product margins will improve. But somewhere, higher margins, whether customers will be able to sustain. So there can be some volume impact also. So overall, things are very volatile in that sense to how the situation will happen. But there are some -- price-wise, there are definitely some of the products are -- the margins are improving, but there can be a corresponding volume contraction, custom products.

Got it. So overall, it will remain in that 25% to 35% range, itself. But there is no...

Yes. That is what -- broadly current year activity.

Okay, sir. Are you seeing any benefit in the ongoing quarter post the end of Q2?

Yes. That's what I think. Q3 and Q4. There are some where the margins are improving, but we see that somewhere -- some of the annual industries are not able to sustain those kind of a price increase, so some sort of a balancing will take place.

The next question is from the line of Ritesh Gupta from Kotak.

Just one point of follow up. On the numbers side, can you talk about 25% growth you talk about? You talked about the EPS growth or you talk about the PAT growth? Because there is a 5%, 6% differential in the PAT on the EPS for the year.

On PAT.

Okay. It was on PAT growth, got it. And just on the spectrum side as well, I mean, you said that you already reached about 80%, 90% utilization. And it was actually public because you did kind of double your gross even in last 3 whole years. And in that context, the gross profits haven't released a doubling level as yet. I mean we kind of pretty much had a muted '20 and '21 years. So is it that you still are running at the realizations, which are lower than, let's say, what you probably saw in '19/ '20? Or you think you already have these optimum realizations from those products?

No, the 80% to 90% was something which was already commercialized earlier. The chlorobenzene plant, what we have set up, and some of the newer commercialization, there yet to be reaching, like, a higher capacity utilization.

The next question is from the line of Rohit Nagraj from Emkay Global.

Thanks for the follow up. I'm audible?

Yes, Rohit, sir. Go ahead.

Yes. Sir, this quarter, we have recognized $7 million on the long-term contract. Last quarter, it was $4.5 million. So any particular reason for this?

Basically, it's a volume which is there across different quarters based on the volume commitment accrual comes in. So if I look at it last year, it was $10 million for first half, and it's around $11.5 million, broadly around similar -- $11.5 million for this year, first half.

Right, right. And when we're talking about 25% to 35% PAT growth, that is organic, excluding the final settlement amount, right?

Yes, it doesn't include the last termination and all.

[Operator Instructions] The next question is from the line of Tanuj Mehta, an individual investor.

Sir, I had a couple of questions.

Sorry to interrupt, Mr. Mehta. Sir, there's a lot of background disturbance on your line.

Yes. Is this clear?

No, sir. There's still disturbance.

Hello?

Yes, sir. Please proceed.

Sir. I had a couple of questions. The first one pertains to a long-term contract. So sir, can we see long-term contracts contributing 1/3 to our revenue, let's say, in the next 1 or 2 years? And sir, in total, how many long-term contracts do we have?

Still, only, in this contract, which were of a larger tenure, 10 years or so, which were put it in public domain. But we have a lot of other contracts, which are 4-year, 5-year terms also. As such, some of the contract gets rolled over. A 3-year contract rolls over 4 or 5 times. We also have other contracts also. In general, percentage-wise, this contract, which we have put in public domain, that'll be only about 10% to 15% on the top line.

Okay. So in other terms, if I was to make it. I mean -- so we can say another part of our revenue of a sizable revenue would be from this kind of contracts, which would be like auto renewed or basically, there is a consistent business flow?

Yes.

Yes. And this includes the contracts which are of a tenure of less than 5 years, which are regular in nature and so on? Okay. And may I -- if I may ask another question, I wanted to know that let -- by next year, we would be done with most of our CapEx by FY '23. So post that, we would be seeing margins increasing in an upward trajectory by -- so how would we see the margins from that year, sir?

Yes. Then the volume growth will happen in those products, where the expansion will be over in this FY '22 and FY '23. So margins, as the capacity gets further ramped up in FY '24, '25, that benefit will come up. But by the time, there'll be newer projects, we will get commissioned for the new product lines.

The next question is from the line of Pranav Tendulkar from Rare Enterprises.

Congratulations on the good set of numbers. Sir, I have just 2 questions. When is that from, say, 2016/'17, our gross block has almost tripled or 2.8x, but our revenue has just become probably 1.8x. So is this anomaly because of we're entering into a larger space where asset turn is lower? Or is there anything -- and if you'll do same thing for EBITDA per fixed assets, that also is a similar observation that EBITDA has become, I think, 1.7x, 1.8x and gross block is almost 2.8x and only for 5 years, yes.

Generally, value-added products, the asset turn ratio is lower. And EBITDA, also some of the -- because some of the recently commercialized capitalized project yet to get full volumes. And in general, the capital costs have increased. And also, some of the CapEx is more on sustainability-related measures also.

Right, right. So can we assume this trend going forward?

Yes. So this should be -- current number should become more of a benchmark than the earlier numbers.

Okay. Okay. So currently, whatever is commissioned, what is the EBITDA capacity of that commissioned project? I'm not saying CWIP, which is around INR 1,600 crores, but whatever is commissioned, what is the EBITDA capacity of it? Because you keep on stressing that EBITDA margin is actually constant and pricing is not in our hands, which I understand completely and I agree with it.

Yes, that absolute number, we'll not have, often, available that.

Sir, if I have to just address this question, considering what is there and what are the ones which are coming on stream from now on until FY '24, we've given a growth guidance considering that -- the fact that many of these projects might start seeing a decent utilization by FY '24. So from that basis, considering FY '21 as a base, we are expecting the EBITDA, the bottom line growth to be almost 1.7 to 2x to FY '21. So that should give you an indication in terms of where this will continue to.

Right. Right. And that includes the CWIP commissioning also, right? So whichever INR 1,600 crores is currently in September quarter, and then there will be some more CapEx, it includes that future CapEx in the guidance. Am I right?

Yes.

The next question is from the line of Amar Mourya from AlfAccurate Advisors.

Just continuing with the last question. Sir, if I see, almost in last 3 years, 2021, we would have commissioned -- I mean almost around INR 3,000 crores kind of CapEx, right? And then is it -- hello?

Yes.

I think in 2021, till now, how much of the CapEx, which we had capitalized INR 2,000 crore?

In 2021?

Yes.

So in 2021, the commercialization was roughly around [ INR 100 crores ] if I'm not...

So I'm saying FY '20 and FY '21, altogether, we would have commercialized -- I mean, capitalized around INR 2,000 crores kind of a CapEx?

Yes.

Is that the right number?

Yes. Yes.

Okay. And plus now INR 1,600 crores of CWIP. So out of this INR 1,600 crores of CWIP, let's say, by '23, how much would be the capitalized number?

The INR 1,600 crores, yes, that will get capitalized, yes.

The whole INR 1,600 crore will get capitalized, right?

Yes.

Okay. So around about INR 3,600 crores kind of a CapEx, right? And if I see from '20 to '21, currently around about, in terms of the revenue growth, '20 to '22, the revenue growth would be -- the additional revenue which would have added to around INR 1,600 crores. So when you say that -- I mean kind of 2x kind of [ sweat ] asset ratio. So is it like we are talking about adding INR 6,000 crores or INR 6,500 crores kind of additional revenue from this combined CapEx in next 3 years or 4 years?

The asset turn ratio would not be in the range of 2x.

Then it would be what? 1.5x?

We have been in the range of 1.5 to 1.7 kind of stuff, because many of these initiatives are at a higher end of the business on a value-added basis, over the -- a bit of a higher investment as compared to the turnover kind of stuff. And that's why the delta margin component over there was a bit higher..

Okay. So basically, you're saying, in terms of the revenue turnover, that may not populate. But if I see the fixed asset versus the EBITDA...

Yes, yes, yes, plus the additional aspect is and part of the reinvestments, which is done, pouring on the sustainability initiatives and upgradation and other things, which will not add up directly to the turnover.

Okay. Okay. Okay. So then how to look this number? Like when you're saying that, okay, the historical numbers are not valued in this context. And we have to -- we have done a lot of investment into the building blocks for the future CapEx or -- for the sustainability purpose. So when you are saying that, in terms of the revenue, I mean, fixed asset to revenue turnover, it is not -- then how it will add to our bottom line then in the context?

Overall, I think 1.7 to 2x by FY '24. I think that should reach to almost INR 9,000 crores, right, offline?

It should reach around 8.5 to 9.5, yes, in terms of the numbers.

Okay. So INR 9,000 crores from the current, let's say, '22. Okay. Fine, sir. Fine.

The next question is from the line of Surya Patra from PhillipCapital.

Just 1 question. So in this current juncture sir, we are seeing kind of a normal situation in terms of cost, in terms of the freight challenges and all that, that is 1. And secondly, we are seeing kind of a peak disruption situation from the China side. So anyway, this situation, the disruption was supposed to benefit us in terms of incremental supply opportunity. Whereas in terms of the -- this, the trade issues and all that, that is likely to have some impact to our supply capability this way. So considering these 2 abnormal situations, how should we see that -- whether there is a likely delay in our execution of the long-term contracts, I mean, the -- let's say, the second project, which is supposed to add, annually, INR 500-odd crores. So can we see that the optimal annual run rate by FY '24/'25 only, not nearly in the near term, not in FY '23? Similarly, the third project of 900-odd numbers, so INR 90 crore odd number. So that is -- that could not come in the '23, rather it will come in FY '24, something like that? So that is 1 angle. And second question also is, sir, these disruptions globally at its peak, now more supply opportunity that should be coming. So whether we have built any pipeline or we have kind of a visibility also, new contract signings or anything that we have already achieved on that line might not have specifically highlighted or announced or something like that or any kind of business visibility that you've already added for your business. So these 2 aspects are: One is whether the current challenges will delay in ramping of the long-term supply arrangements; and secondly, whether we have benefited, in any way, in terms of our supply ability or future supply capability.

Yes. This -- both second and third contracts, there is enough demand visibility. So we don't see any issues. We should be able to ramp up substantially in FY '23 itself or both second as well as third contract. And overall, the China Plus One is panning out, and we are continuously exploring one-on-one kind of a contractual business also as well as a multi -- like, chlorotoluene range will be a total multi-customer, multi-end use sector kind of a product. So both activities are currently pursued, and we see the growth in both ways.

And sir, you had also mentioned, sir, when you talked about this FY '22 to '24 kind of outlook that you were provided for the first time. So at that time, you had mentioned that you also started working on the developmental project with the innovators or the large global customers. So anything on that, if you can update us, I mean, what is the progress? Or in which line that you are asking, what is the nature of those?

Yes. In Pharma also, we have started working with innovators. And also in chemicals, we already have relations with the multiyear relations with just so many customers. We have been working with them on that. So they are at various stages. Some of them on R&D designs, and all those transactions should be starting towards -- some of them towards the end of this year, and major projects will start construction in FY '23.

The next question is from the line of Rohan Gupta from Edelweiss.

Sir, generally, we have seen a rising price scenario in inflationary trend. We tend to benefit from the cost or inventory benefit, like, earlier also, a disruption in China, the fire at the Chinese plant. We have seen at that time, we have benefited almost 2 to 3 quarters from the inventory gains which we have. We are almost in the similar conditions, sir, in the current scenario. But I think this time, sir, it's coming in an opposite direction and we are seeing margin pressure. So anything which has changed? Because we see the similar parallel from the previous conditions so...

No. Generally, inventory gain takes place, but some of these export takes on a lag basis. So that kind of offset with each other.

So sir, what you are seeing is the continuous margin pressure and a slow pass on to the end customer, so that you are alluding that even in Pharma and in specialty chemicals. There may be some margin pressure because we are slowly passing it on to the end customer, the [ trading ] the costs. What is...

Chemical -- that's chemical, first quarter in local will be same quarter, but export, generally, has a lag, yes.

And we are seeing a very solid demand in domestic market, right? You are seeing the domestic environment is much better than the exports market and there is solid demand. So where we are able to quickly pass it on to the end customer. And we always carry -- given our nature of the business, you always carry some raw material inventory of at least 1 month to 2 months. So when we are able to pass it on to the end customer within a month and carry some inventory, we -- at least for the time being, we should be able to see some margin improvement and some inventory, like, gain, which somehow are missing in the current quarter or is not looking in your commentary. So while in the previous -- every time -- that's what I'm seeing in an inflationary world or inflationary environment. We have always seen that company benefiting from the inventory gain, which somehow is missing. So just wanted to understand that anything changed or any particular things which are missing here?

No, you are right. There will be, definitely, an inventory gain. But when some of the costs are not passed on, so that kind of offsets in the margin. Same way if the prices are on a declining trend, also the same thing happens. So the inventory train -- part of the inventory gain or loss gets offset because of this lag impact.

So are we slow in passing it on to the end customer compared to earlier situations?

No, no, no. It is the same. There is no change in that, no.

Okay. Sir, if I just look at our spreadsheet and -- in the current quarter itself, if you will maintain the bottom line PAT at roughly similar level, like, INR 175 crores in the current quarter. And if you maintain that run rate itself, we are looking roughly 32% PAT growth on Y-on-Y basis, while your guidance is 25% to 35%. So do you see that there is no PAT growth even in the second half? I mean, the run rate which we have is roughly INR 175 crores is bottom line. We are going to continue with that because we have commissioned a lot of capacity in last first half or at least in the last 3 to 4 quarters. While the CapEx commissioning or the capitalization of that CapEx should lead to volume growth, which somehow is missing. Even you mentioned that in the current quarter also, there is roughly 8% to 9% only volume growth, while we have added capacities much ahead of the time line in last 3 to 4 quarters. So why all these volume growth here? And in your -- not looking in your guidance, because we are still continuing and doing the current run rate, that's what I want to understand, sir.

There are a lot of factors. One is actually coal price. Coal price, energy price is something which becomes difficult to pass on. So we are making an effort to pass on that coal price. But part of that, that impact will more come in Q3, Q4. That's why now we have said guidance is -- we kept a broader range in that sense. And also, this ocean freight and availability of containers and also those uncertainties are still there. So that is another reason that we are maintaining this kind of a guidance.

Okay. So we are -- because of the uncertainty in margins, you see that there may be some margin pressure, which may restrict our bottom line growth despite top line growth.

Yes, yes, yes.

Okay. Sir, just last question from my side, if I'm allowed. Sir, you mentioned that almost the CWIP, which we are, right now, having is almost at the highest ever level of INR 1,600 crores in the H1 balance sheet. Also, we are going to add another INR 1,200 crores, INR 1,300 crores. So it means that close to INR 3,200 crores kind of capitalization, which you are talking about. Because you said that over next 2 years' time, by FY '23, we are going to capitalize all this CapEx. So over next 1.5 years, we are going to see other roughly INR 3,000 crores getting capitalized. That's a huge increase in gross block. And so do you see that there will be a time period where we'll be struggling with a lower utilization, maybe in end of FY '23 or where we may see some margin pressure or bottom line pressure? Or the utilization level will continue to pick up? And do you see that -- and we will not see any impact on profitability?

No. Some of this FY '23 project will be for the newer product lines. So that will not get commissioned in FY '23. It will be more -- it will be commissioned in FY '24 and FY '25. So this -- currently, whatever we have, INR 1,600 crores capital WIP, that will be capitalized.

By FY '23?

Yes. Whatever is ongoing will get capitalized, but something which we'll be starting in the next financial year, those -- none of them will get capitalized in next financial year.

Correct. But sir, still in the current product pipeline itself, we are planning to invest another INR 1,000 crores...

No, no, that -- part of that is already invested. Part of that is already part of this capital upgrade have been.

Okay. Sir, I thought that you had mentioned last time that you will be investing more in the product pipeline, in the current pipeline or the current product line, another INR 1,000 crores to INR 1,500 crores.

So that is already done in these 6 months.

Okay. So you are saying that in the current product pipeline, hardly INR 500 crores to INR 700 crores more have to be invested and that's all in the...

Yes, yes, yes.

That's all in the -- creating the new product pipeline.

Yes, yes, yes.

Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Yes, it has been a pleasure interacting with you over the call, and wishing you all a very happy Diwali and prosperous New Year. Before we close the call, let me reiterate that with the execution of our planned growth objective, we look forward to driving strong value for all stakeholders associated with Aarti Industries. We thank you for taking time out and engaging with us today. We value your continued interest and support. If you have any further questions or would like to know more about the company, kindly reach our Investor Relations desk. Thank you.

Thank you. Ladies and gentlemen, on behalf of Aarti Industries, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.